now possible to invest in a diversified portfolio of S12J funds to significantly reduce your tax

now possible to invest in a diversified portfolio of S12J funds to significantly reduce your tax

26 November 2018

Monday, 26 November 2018: Section 12J season opens once more allowing South Africans to write off 100% of the investment against their taxable income. There are more than 100 registered Section 12J companies in South Africa and is estimated that the market has raised more than R3.6 billion in investments.

Westbrooke Alternative Asset Management also offers an industry first; the ability to invest directly into diversified portfolios of S12J funds that suit an investor’s individual requirements, all with a single manager. The options include the income, balanced and growth portfolios, which will each invest into an appropriate weighting of Westbrooke’s S12J funds.

As South Africa’s largest Section 12J manager, Westbrooke Alternative Asset Management, looks after almost half of the capital invested in S12J funds in the country. Its latest offerings provide further opportunities to stimulate private investment in the SA economy, grow jobs and simultaneously reduce an investor’s tax.

Jonti Osher, fund manager at Westbrooke Alternative Asset Management explains, “Some investors may be confused about which S12J investment to select. We now offer them the choice of income, balanced or growth portfolios which includes a combination of investment strategies. Because S12J investors are usually new to this asset class, we have created an online investor toolbox to provide full information so that those interested can fully understand the incentive prior to investing. Investors will be able to deduct the full investment against their taxable income and reduce the amount of tax payable at the end of February 2019.”

S12J is an investment tax incentive which was introduced by SARS to boost the economy by encouraging investment into private companies of a specific size which operate in select industries. Individuals, companies and trusts can benefit from up to 45% immediate tax relief, reducing the cost of the investment while providing downside protection and enhancing overall returns. However, the investment must be held for at least five years.

The S12J asset class is particularly attractive to those tax payers who have incurred capital gains tax, as the inclusion rate for individuals allows investors to invest less than the total cash realised on a capital gains event.

Westbrooke’s 2019 investment offering introduces two new funds that evolved from existing Westbrooke funds: Westbrooke Host and Westbrooke Base, as well as a limited offering of Westbrooke Aria (launched in 2016) and Westbrooke Stac (launched in 2018).

Tourism and hospitality

Westbrooke Host (Hospitality Strategy) provides investors exposure to the South African tourism and hospitality sectors. The strategy invests in a portfolio of well-located, property-backed, income-generating hotel businesses across South Africa aiming for a return of around 17% per annum. Westbrooke’s previous hospitality strategies have raised approximately R455 million and have deployed funds into more than ten hotel assets, with on target investor returns.

Student accommodation

Westbrooke Stac (Student Accommodation) invests alongside experienced, reputable operators which own and manage student accommodation operations situated in strategically located hotspots across South Africa including Pretoria, Johannesburg, Cape Town and Stellenbosch. The investment aims to provide an attractive dividend stream as well as capital growth in the underlying property assets on exit. Stac aims to assist government in promoting education by addressing the country’s bed shortage in key student hubs. Now in its second year, Westbrooke Stac has raised approximately R360 million in third party capital, with investor returns in line with returns in excess of 17% per annum.

Rental assets

The Westbrooke Aria (Alternative Rental Income Assets) offering invests in a portfolio of asset-backed rental businesses with contractual revenues. The underlying investee companies focus on providing different types of moveable assets, such as vehicles and equipment, on medium and long term operating rentals to these customers. For example, Westbrooke Aria provides growth capital to a company that rents, services and maintains scooters used by Famous Brand franchisees. Westbrooke Aria has raised approximately R860 million in third party capital and has invested in over twenty underlying rental business across South Africa. To date, investor returns have been in line with targets of around 15% per annum.

Dino Zuccollo, fund manager at Westbrooke Alternative Asset Management says, “Our previous investors have been successful in obtaining their tax relief and the process has been seamless through the use of the SARS e-filing system. We are focused on protecting our clients’ money by investing in asset-backed investments which also fulfil the mandate to stimulate investment into the SA economy. Westbrooke focuses on risk mitigation and capital preservation through asset-backed S12J investment strategies that aim to deliver attractive risk-adjusted returns.”

The minimum investment in these S12J funds is R1 million and the offers close on 26 February 2019.

This is for information purposes and returns are not guaranteed. The targeted returns indicated in are indicative in nature and are based on the performance of Westbrooke’s previous S12J investment strategies. The value of all investments and the return may fluctuate. Investment in financial products is subject to risk for the investor and investors are advised to be aware of these risks prior to investing.

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Can I use debt or gearing to make an investment into a S12J company?

Yes, you may utilise a loan / gearing to make an investment into a VCC, subject to complying with Section 12J(3)(a) of the Income Tax Act

What is the size of the S12J industry?

As at Feb 2018, there has been c. R3.6 billion raised into the Section 12J industry. Westbrooke is SA?s largest Section 12J fund manager, managing c.50% of the capital raised in the industry to date.

How long does the S12J incentive last for?

The VCC regime, introduced in 2009, is subject to a 12-year sunset period that ends on 30 June 2021. The upfront income tax relief will only apply to VCC shares acquired on or before 30 June 2021.The sunset clause is to be reviewed, and may be extended.

What is the term of my investment?

The term of the investment will be 5 years, with a realization period of 18 months (if required).

Does a section 12J investment carry risk?

As with any private equity investment, an investment in a Section 12J company carries risk. It?s important, therefore, to assess the investment strategy of the Section 12J company to ensure you understand the associated investment risk as well as the expertise and track record of the asset manager.

What is the annual limit per investor for subscriptions into a Section 12J company?

There is no annual limit for subscription into a Section 12J company.

Can the tax relief be recouped by SARS?

Only if you sell your shares within 5 years of their being issued, will you incur a recoupment and have the tax relief withdrawn.

What do I need to give SARS or my Tax Advisor to claim the deduction?

Westbrooke will provide each investor with a tax certificate which may be requested as evidence of their investment into a Section 12J company.

How can I obtain my tax relief?

Investors can claim the tax relief by either reducing their estimate of taxable income when submitting provisional tax returns or by obtaining a tax refund through the annual income tax assessment.

When can the tax deduction be claimed?

An investment into an approved Section 12J company is 100% tax deductible in the tax year you invest.

What is a Section 12J company?

A Venture Capital Company as described in Section 12J of the Income Tax Act, which came into operation with effect from 1 July 2009. Section 12J is a tax-based incentive designed to encourage individual and corporate investors to invest in a range of small and medium size companies by investing through Section 12J.

The aim of the incentive is to create a pooling mechanism of passive investors who get an upfront tax deduction for stimulating the South African economy.